TDS disallowance u/s 40(a)(ia) is applicable while computing income chargeable under the head “Profits and gains of business or profession” and it is not applicable to any other heads of income.

 

 

 

Short Overview  Provision of section 40(a)(ia) is applicable for computing the income chargeable under the head “Profits and gains of business or profession” and not for computation of income under any other heads of income, including capital gains as the wording of said section confirms. Therefore, the disallowance made by AO under section 40(a)(ia) for not deducting TDS under section 194 on commission payment made in connection with sale of immovable property and confirmed by CIT(A) treating assessee as assessee-in-default under section 201 was not justified and hence, addition was deleted.

Assessee firm had capital gains on which commission was paid which was claimed as an expenditure in relation to such “transfer” of immovable property. On this commission it was noticed that TDS was done under section 194H only on part of the amount. On the balance commission on which TDS was not deducted the AO invoked section 40(a)(ia) which was upheld by CIT(A) holding assessee-in-default under section 201. 

It is held that  Section 40 clearly stipulates that “Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Hence, it is evident that the provisions of section 40(a)(ia) is applicable while computing income chargeable under the head “Profits and gains of business or profession” and it is not applicable to any other heads of income. In view of decision of Coordinate Bench in Shushila Mallick s case section 40(a)(ia) can be invoked only on income from business and it can in no way be invoked under the head capital gains.

Decision: In assessee s favour.

Applied: Mrs. Sushila Mallick v. ITO (2012) 19 taxmann.com 233 (Luck) : 2012 TaxPub(DT) 0487 (Luck-Trib).

Referred: CIT-I v. Smt. Sushila Mallick, Prop. M/s. Cyber Soft India (2013) 36 taxmann.com 537 (All) : 2013 TaxPub(DT) 2660 (All-HC) and Mahatma Gandhi Seva Mandir v. Deputy Director of Income Tax (E) 1(2) (2012) 21 taxmann.com 321 (Mum).

 

IN THE ITAT, BANGALORE BENCH

N.V. VASUDEVAN, V.P.

R.K. Associates v. ITO

ITA No. 681/Bang/2020

11 February, 2021

Appellant by: B.R. Sudheendra, Advocate

Respondent by: Ganesh R. Ghale, Standing Counsel for Department

N.V. Vasudevan, V.P.

This is an appeal by the assessee is against the Order, dated 2-9-2020 of the Commissioner (Appeals)-2, Bengaluru, relating to assessment year 2014-15.

2. The only issue that arises for consideration in this appeal is as to whether the Revenue authorities were justified in disallowing a sum of Rs. 15,12,056 by invoking the provisions of section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter called ‘the Act’), while computing income under the head “Capital Gain”.

3. The assessee is a partnership firm. The assessee filed the return of income declaring loss of Rs. 1,47,535. The computation of the total income of the assessee was as follows:-

4. The computation of income under the head “Capital Gain” as given by the assessee was as follows :–

5. It can be seen from the computation of income under the head “Capital Gains” that the assessee had deducted a sum of Rs. 76,99,056 on account of commission while computing income under the head “Long Term Capital Gain”. The assessee had sold a property and declared Long Term Capital Gain (LTCG) on sale of property. In the course of assessment proceedings, the assessing officer found that on the total commission of Rs. 76,99,056 paid in connection with the sale of the property, the assessee had deducted tax at source only on a sum of Rs. 61,86,988. In respect of difference viz., Rs. 15,12,056 no TDS had been done by the assessee. The assessing officer invoked the provisions of section 40(a)(ia) of the Act and made the addition of Rs. 15,12,056 to the total income returned by the assessee.

6. Before Commissioner (Appeals), the assessee submitted that the provisions of section 40(a)(ia) of the Act are not applicable while computing income under the head “Capital Gain” and therefore the disallowance made by the assessing officer cannot be sustained. On perusal of the order of Commissioner (Appeals), it appears that in para 7.4, he has proceeded on the basis that the assessee can be treated as the assessee in default under section 201 of the Act and accordingly he confirmed the order of the assessing officer. A reading of the conclusions of the Commissioner (Appeals) in paras 7.4 and 8 of the impugned order can only lead to the above conclusion. These paragraphs reads as follows:–

“7.4 In the instant case, the appellant has paid commission of Rs. 76,99.056 for the sale of immovable property but has deducted tax at source only in respect of Rs. 61.86.988. Accordingly in view of the provisions of section 194H of the act, the appellant has failed to comply with the provisions of the act of deducting tax at source in regard to the balance amount of Rs. 15,12,056 and accordingly the appellant is assessee in default in respect of such tax as per the provisions of section 201 of the Act.

8. As discussed above, since the provisions of section 40 (a) (ia) of the Act are not applicable thus the alternative contention of the appellant that the disallowance will be restricted to 30% of expenditure as per the provisions of this section applicable in the year under consideration, doesn’t have any relevance.”

7. Aggrieved by the order of the Commissioner (Appeals), assessee is in appeal before the Tribunal. I have heard the rival submissions. The learned Departmental Representative relied on the order of the Commissioner (Appeals). The learned counsel for the Assessee reiterated the stand of the Assessee as put forth before the Commissioner (Appeals).

8. I have considered the rival submissions. The provisions of section 40(a)(ia) of the Act reads thus :–

Amounts not deductible.

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,–

(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date23a specified in sub-section (1) of section 139 :–

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :–

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVIIB on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.)

Explanation.–For the purposes of this sub-clause,–

(i) “commission or brokerage” shall have the same meaning as in clause (i) of the Explanation to section 194H;

(ii) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

(iii) “professional services” shall have the same meaning as in clause (a) of the Explanation to section 194J;

(iv) “work” shall have the same meaning as in Explanation III to section 194C;

(v) “rent” shall have the same meaning as in clause (i) to the Explanation to section 194-I;

(vi) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;)

9. The question for consideration is as to whether the provisions of section 40(a)(ia) is applicable for computing the income chargeable under the head “Profits and gains of business or profession” or computation of income under any other heads of income also. Section 40 clearly stipulates that “Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Hence it is evident that the provisions of section 40(a)(ia) is applicable while computing income chargeable under the head “Profits and gains of business or profession” and it is not applicable to any other heads of income. In the case of Mrs. Sushila Mallick v. ITO reported in (2012) 19 taxmann.com 233 (Luck) : 2012 TaxPub(DT) 0487 (Luck-Trib), the Hon’ble Lucknow ITAT has held that the brokerage had been paid on account of sale of the properties, the income of which had been shown under the head ‘short-term capital gain’. The selling of properties was not the business of the assessee and, as such, the amount involved in the transaction relating to the selling of properties was not the part of turnover of the assessee. In view of same the Hon’ble ITAT held that in facts of the case the provisions of section 40(a)(ia) of the Act is not applicable. This decision was affirmed by the Hon’ble Allahabad High court in the case of CIT v. Sushila Mallick (2013) 36 taxmann.com 537 (All) : 2013 TaxPub(DT) 2660 (All-HC). In the case of Mahatma Gandhi Seva Mandir v. DDIT (Exemp) reported in (2012) 21 taxmann.com 321 the Hon’ble ITAT Mumbai has held that the exception in section 40 is carved out, only for the purpose of section 28 and not for computing the exemption of income of a charitable trust under section 11. The disallowance made under section 40(a) will only go to enhance the business profit of an assessee whose income is assessable under section 28 and not otherwise. Hence, provisions of section 40(a) are not applicable in case of charitable trust or institution where income and expenditure is computed in terms of section 11.

10. In view of the clear language of the relevant statutory provisions and in the light of decisions referred to in the earlier paragraphs, I am of the view that the disallowance under section 40(a)(ia) of the Act made by the revenue authorities cannot be sustained and I direct the said addition to be deleted and allow the appeal of the Assessee.

11. In the result, appeal of the assessee is allowed.

Pronounced in the open court on the date mentioned on the caption page.